Follow by Email

Tuesday, December 6, 2016

Eurogroup's Debt Relief - Much Ado About Nothing?

In its Statement on Greece, the Eurogroup announced the following measures which are to be understood as debt relief:

* The smoothening of the EFSF repayment profile within the current weighted average maturity of up to 32,5 years;
* The waiver of the step-up interest rate margin amounting to 200 bps related to the debt buy-back tranche of the 2nd Greek program for the year 2017;
* The use of the EFSF/ESM funding strategy as markets allow to reduce interest rate risk without incurring any additional costs for former program countries. This measure will be implemented through: (i) exchanging the EFSF/ESM back-to back notes supporting the bank recapitalization loans to Greece, (ii) the ESM entering into interest rate swaps to mitigate the risk of higher market rates and (iii) introducing matched funding for future disbursements to Greece under the current program.

In a commercial bank, loan approval competencies depend on the size of a loan. A small loan might be approved by two officers of the bank, a very large loan might require the approval of the entire board. When changes to the terms of an approved loan are to be made, the same competencies which were required to approve the loan have to approve the changes. Unless...

Oftentimes, changes to loans which required the approval by the entire board may be so minor that it would be a waste of time and resources to involve the entire board. Thus, there is normally a definition of minor changes which can be approved by, say, only two officers of the bank.

The above measures which are understood to be debt relief fall into the category of minor changes. The smoothening of the repayment profile is only required because an appropriate smoothening was not implemented at the outset. To forgo a future margin hike of 200 bp is nothing other than foregoing an unrealistic and inappropriate margin hike. And to use derivatives to convert interest rates from floating to fixed is something every corporate treasurer does every day.

So is this really much ado about nothing? Not really. There are some advantages which make Greece's debt sustainability appear a bit better (or less bad) than before. But it is amazing that 18 Finance Ministers are required to approve such changes.

22 comments:

The IMF formula requires a debt haircut first and austerity second (as a follow up to a substantial debt haircut).

Berlin's formula (because it's only concerned to save the euro) requires only austerity and great resistance to debt reduction not for sound financial reasons but purely political.

So what you is see are some intermediary steps in solving the Greek crisis with no real effect. They only give the false impression that something is done whereas in reality nothing of substance really happens.

Not such a big deal for the Eurogroup countries, but a big change for Greece.Worth looking what the change entails:- no change to debt/GDP. So like after previous debt restructurations for Greece from the public sector, it will not give them any Public recognition gain. I will still read that bloodthirsty creditors are bleeding Greece for imterest payments on an unsustainable debt.- Other EZ countries subject to risk on evolution of their interest rates would love to secure their funding costs

And let's not talk about the elephant in the room, the fact that Germany asks for primary surpluses of 3,5% for 10 years after 2018. The IMF of course has been saying that this hasn't been achieved by any country (let alone one effectively bankrupt and with 7 years under internal devaluation-recession), but Germany remains "optimistic" that Greece will do it. Where this "optimism" stems from, is something that only Schauble can answer! The same goes with the IMF's insistence that the path for the greek debt must be outlined now. On paper, this should have been done in 2011, but at the time the Europeans were naive and didn't heed IMF. The naiveness continues, as we all have our behavioural traits that won't change with age.

Now, a malevolent observer, could suspect that Schauble, isn't really optimistic about the greek economy, but he is trying to actuate his older plan of forcing Greece out of the euro.

Which at this point of things, to my compatriots back at home, i can only shout a piece of brotherly advice: Eject, eject, eject! There is nothing left for you in this club of hypocrits, the final result of staying and enduring the "german cure", will be worse than if you had ejected in 2011 and worse than what will happen if you stay to endure the long agony.

Let the merry northern family keep playing the band and be the first to jump off the Eurotitanic. The warning shots have been fired, but north of the Rhine they are all too busy with self-righteousness to notice.

There are some truths in what you state above, but one thing i will certainly not do, is to contribute to the brain drain manifested and leave my country. I prefer to stay an help educate to my colleagues and compatriots and youth of my knowledge. I do not judge my compatriots who have left but i personally will stay and try to better my loved environment. I only recently had a business trip to a northern nation for business and only solidified my idea of preference of staying in an economically strained economy rather than live on for my stomach in an "economically strong" country. And to be quite honest, apples for apples, private sector employees in all countries right now are under tremendous stress and tyranny. There may remain some few luxuries but things are not good everywhere.

As for your comment,

<<<>>>

..in either outcome he will win. He is quite a smart politician and will find the positive in any scenario. That is what makes him a good but hated politician. Unfortunately for him, he has become so hated that i fear for his life. As a person or a human, i have not made my conclusions on this person though. He is a hard character to read nor his true motives on how he sees the world and what he wants it to become.

From one point of you, maybe Schauble could be right? If you consider that the remaining privatizations if ever made and enforced and handed over the private sector, Greece could very easily become a very prosperous place. It only needs one good crank of one gear to get smaller gears rolling. Unfortunately, most people maintain a very short sightedness on this possibility. On the other hand some debt relief would be nice because that which was agreed is not felt for 30 years down the line.

As for the day to day though, as i wrote in some 5-6 articles back, more taxes, more taxes, more pension reductions, finally some possible public workers salary reductions (this is a new one) and again more taxes. Great reforms!

First, let me say, that i left Greece 35 years ago, for studies. I didn't leave now.

Second, you have to mitigate the damage already sustained. I remind you, that Greece is probably the only country in the world history, to have sustained warlike recession, endured IMF program and 7 years later, the same IMF openly admits that the debt is not sustainable and nobody seems to find that odd. Long gone is the once declared target of having debt at 120% in 2022.

In poor words. They use the debt as carrot and you are in the extremely unfavourable position, where you are literally at the mercy of your creditor. A private creditor could make appeal to a judge. There is no judge for countries.

Let me reiterate what the US ambassador said yesterday on the greek media: "political and economical uncertainty drives away potential investors". And let me add an old greek proverb: "better lose your eye, than your (good) name". As long as Greece remains in the news as the ever bankrupt, on the brink of Grexit, underperforming, country, don't expect anyone to bring money to invest in Greece. Be it greek or foreigner. You will be eating your own flesh for years, chasing your own tail, with the german punitive demands, until you finally give up and go the drachma. So you may as well cut your loses and do it now.

You will still get a hard hit, but you will rebounce faster, because once someone does a clear-cut default, everyone on the outside knows that you start on clean slate and the data at hand about what obstacles remain in the future, are clear for everyone to see. Plus, as cynical as it may sound, it will move greek capital from abroads to Greece, since the drachma will be devalued.

Otherwise, in 10 years time, at 3,5% primary surplus, the only people left in Greece under 40, will be the refugees and immigrants that the EU has dumped to Greece, as an open air penitentiary. Nobody young will stay in a country without hope.

What you have to realise, is that they don't care about "reforms". They only care about "numbers", in order to give the smallest debt relief possible, after having tested how far you can go, being squeezed, before the grexit. They don't care if the taxes are counterproductive or if they kill any growth spark. They will drag you like that for 30 years if you let them, so that they don't have to go to their electorate and say that they decided to give you relief.

Either you will realize that and do something about it, before there is nothing left to save or you can stay and wonder for how long this policy will go on.

One thing is to be dragged to the bottom because of your own decisions. Another is to let be dragged to the bottom and be a debt colony and administrative protectorate till 2060.

Here are the hard truths that at a certain point in time all Greeks need to be awaken to:

1. There is no future in the eurozone not even for the eurozone countries themselves. People confuse a simple free trade area such as the EU with something bigger that does not exist nor will ever exist. Free trade is a simple concept that does not need Brussels type bureaucracies to be executed. Only low I.Q. people make easy things purposefully complicated and difficult by design.

2. Since the eurozone is a farce (whose only purpose is the rapid and smooth trade surpluses of Germany) then Greece has really no reason to be part of it. The fact that Greece finds itself in the eurozone is by itself strong testimony that the political class of Greece is of very low quality indeed and of the worst possible denominator.

3. The fragmanation of the eurozone has begun in earnest and will continue at a rapid pace going forward.

4. Greece is wasting its time following the flawed advice of irrelevant European clowns who can not take care of their own housecleaning let alone assist Greece in any meaningful way.

Something remarkable happened in classical Greece, but we didn't know about it until very recently. Against all historical odds, they nourished a successful class of entrepreneurs and became wealthy.

Greek authors usually didn't portray their civilization that way. Herodotus famously contrasted Greek poverty with Eastern luxury in an encounter he recorded (or made up) between the Athenian lawgiver Solon and Croesus, the eponymously wealthy Lydian king. Croesus took Solon on a tour of his treasury, then asked him who was the happiest man he had ever seen. Solon replied that it was someone named Tellus, an Athenian of moderate means, who was lucky in having beautiful and good children and grandchildren, and who died old, and heroically, in battle.

Solon's pointed indifference to Croesus' wealth was not lost on his host, who rudely sent him on his way. The fact that Croesus later lost his kingdom and his riches drove home Herodotus' point that wealth is fickle and dangerous, and that the Greeks were better off for not having much of it. The point isn't original to Herodotus, and turns up often in Greek poetry—in this case, in Aeschylus' Agamemnon:

Goddess Justice shines in poor homes,

And honors the righteous life. But gilded palaces

She flees, abashed by their corruption.

Modern scholars have tended to take the Greeks at their word about their own poverty, but Josiah Ober, professor of political science and classics at Stanford, does not. He points out that the Tellus/Croesus comparison doesn't really make sense, since Tellus was a middle-class citizen and Croesus a king. The right comparison would be between the ancient Greek middle class and other middle classes, ancient or modern.

Those comparisons are hard to make, even for contemporary economists who are awash in data. For the ancient world, economic data are scarce. But we now have a mass of information about the ancient economy that we didn't have a generation ago, thanks to the work of a team of international scholars, compiled in the monumental Inventory of Archaic and Classical Poleis (2005).

Ober marshals the data, using an impressive grasp of political and economic theory, to argue that a substantial Greek middle class started growing in the archaic period and soon outpaced that of nearly all ancient societies. Of course, the ancient Greeks would not be considered wealthy by modern American or European standards; but their unusually high standard of living lasted until well after Alexander's conquests, and later Greeks wouldn't reach it again until the early 20th century.

This is a continuation of the previous post on Ancient Greece economics and perhaps the most compelling reason why Greeks do very poorly per their DNA with central planning and empire building (such as the current EU concept and its Roman administration roots):

If this is true—and there seems little reason to doubt it—how did they do it? It is an unlikely outcome for a fractious constellation of city-states that had neither much interest in, nor talent for, empire-building.

Ober's answer relies, provocatively—for a classical Greek historian, at least—on evolutionary biology, information science, and game theory, as well as on the more traditional disciplines of history, archaeology, political science (with an emphasis on Aristotle's Politics), and economics. He devotes part of an early chapter to comparing the Greek city-states to ants around a pond, where no individual ant has much information about resources or colony planning but the entire colony of independent actors thrives as it processes information effectively in a decentralized, distributed system.

Ober is careful not to push the analogy too far, but it effectively frames a central tenet of his thesis: The absence of central planning among the Greek poleis facilitated rather than hindered the innovations that created and spread their remarkable prosperity. He also asserts that neither we nor the Greeks could have understood how this happened until very recently—not just because we lacked the data, but because we didn't have the right intellectual tools.

To explain the world of the Greek poleis, we need to move forward in time, beyond the industrial era into the contemporary world of self-consciously knowledge-based enterprises. It is now widely understood that exchanging and aggregating diverse and dispersed forms of knowledge is a key factor to the success of contemporary purposeful organizations. Traditional ancient societies, in this view, clogged the flow of vital economic information by channeling it through an informationally sclerotic social elite who controlled the peasantry with a combination of religious-political ideology and expertly deployed violence. This political configuration was so common in the ancient world that some economic historians have dubbed it the "natural state," in which most people lived at subsistence level while a tiny ruling class siphoned off all the economy's wealth. In such societies, incentives to innovate were rare: Peasants had no desire to increase their efficiency because they wouldn't reap any economic benefits, and the wealthy already had more than they needed.

The Greeks escaped this economic sinkhole, for a time, partly through historical accident, climate, geography, and culture. The collapse of the Mycenaean palace culture in the late Bronze Age left a political vacuum that no great powers rushed to fill; the Mediterranean climate favored the cultivation of grapes, olives, and grain, which are easily processed and traded in the Mediterranean basin. Widespread colonization in the archaic period spread a common Hellenic culture and language around this "pond," facilitating communication and interaction among about 1,500 independent poleis.

The Greeks leveraged these assets through citizen-centered government and relentless competition and innovation. Each independent polis was a petri dish of political experimentation, and information about what worked and what didn't easily spread among the other poleis. Among the most important of these innovations, according to Ober, was democracy, not necessarily because it was a more just system of government (sometimes it wasn't) but because it was a more efficient means of gathering and processing information, distributed among the citizens, that was vital to the success of the polis.

Although democracy wasn't ubiquitous among the Greek poleis, many of its citizen-centered innovations spread to less democratic states, and some survived even Alexander's conquests. Other essential conditions for prosperity were the maintenance of what Ober calls "fair rules" of government and trade as well as efforts to reduce transaction costs by establishing reliable currency, common weights and meas-ures, and public infrastructure.

Classics scholars will be familiar with some of these ideas, which Ober began developing in Democracy and Knowledge: Innovation and Learning in Classical Athens (2008). But his work will be of interest to anyone who is serious about the history of political economy, or who wants to know more about the relationship between democracy, economic growth, and human flourishing, whether in the ancient or modern world.

Although I would not recommend The Rise and Fall of Classical Greece as an introduction to Greek history, it will richly reward a serious lay reader. One of its most appealing qualities is its multidisciplinary approach, which is the fruit of Ober's extensive and generously acknowledged collaboration with scholars from around the world as well as with his Stanford colleagues in a number of fields, including the sciences. In this respect, it points in a direction that future humanities scholars will need to go if they, too, wish to flourish.

David Wharton is associate professor of classical studies at the University of North Carolina, Greensboro.

I hope these excerpts on the classical Greek economy provided some insights and answers to the key central question this blog by Klaus sought to bring to light since day one.

Namely, what are the Greeks to do in their own power to establish a firm footing in their economic affairs and prosper as a society.

And the answer appears to me to be a highly decentralized Greek environment where relentless competition and innovation are rewarded and highly sought for public goods.

And if the above is true (and I believe it to be as consistent with the Greek DNA) than Greece needs to distance itself from central planning concepts like the EU and the eurozone because such concepts in their architecture are antithetical to the Greek character and the Greek potential.

I have never seen or read anything more precise than this Telegraph opinion excerpt:

"Europe is locked into a highly toxic political confrontation between voters who now realise the destructiveness of the currency union to which they have been shackled, and the impotence of their political class to do anything about it. Indeed, many voters embody this contradiction – rightly understanding the economic devastation that the euro has wrought on their economies, but determined to avoid the inevitable collapse in the value of their own assets should there somehow be a way of reverting to a weaker, national currency."

This assessment is 100% on target. Nothing more to be said. The euro was a collosal mistake and politicians can do nothing about it. Hence the voter anger and the instictive verdict of containing the damage by reverting to national currencies. If the euro continues to exist voters will see another 60% of their assets evaporate going forward. It's a really bad deal.

@V.It is admirable that you want to stay and educate colleagues, compatriots and youth, according to PISA and PIAAC studies they certainly need it. Likewise your attempts to improve the environment here, a short stay here convince one that it is needed, be that the mental or physical one.However, should you be tempted to "eject", do not fear, you have done your patriotic duty, nobody will accuse you of brain drain.

Thank You For your kind words, but the road of my life has been presented to me, regardless of the personal economical prospects i have had and still have elsewhere.

Some of my compatriots leaving, must do this, to see what I see. It is almost also a necessity for many people to leave. It will only help us all. In general i am quite a humanitarian to all people, but regardless of our negative characteristics (O Ellinaras), I am egocentrically passionate of my compatriots and country.

Reading Kavafi's poem on Ithaki at age 12, only stirred me to move to my final "Ithaki" faster. Fortunately, I have the luxury of seeing the world but living in "Ithaki." Some don't and must leave. But all Greeks return to Ithaki. And only Greeks can understand idea to its core.

This thread has turned into a lovely discussion with really nice information and "food for thought." I respect all your opinions and agree with many comments. I especially enjoyed the comments on ancient Greece. Having that in mind while also considering my commenters

Whether we as Greeks brought this onto ourselves or it was brought upon us, or both, the fact remains that the current end result which has an untold story ending, is an unfortunately a necessary evil. I put more to blame on ourselves. The foreigners which created the catalyst simple sought their own best interests. We didn't.

A necessary evil why? Well for starters pre crisis we as Greeks lost ourselves as to who we are. (As Greeks do we not aspire to "know thy self?") Not that we shouldn't have evolved to become eu citizens (which is our place regardless of the nanycrats of Brussels) but in the meantime we lost ourselves. (And to add EU and EE at its core is an idea. It is not a damn number. This idea regardless of the currency union will never die.) This crisis will contribute to find ourselves and I strongly believe we will. Whether we are in Greece or abroad, finding ourselves will only strengthen our will to succeed. And it is that will under hardship, which makes us who we are. Unfortunately there will be casualties within our ranks of Hellenism but unfortunately again it will be a necessity for our future. And with this "will" and unity, which i am sure many of you doubt because you fear your own selves (as Greeks) you will be disproven. Likewise all the economists, banker advisors, IMF's etc. Personally after 40 years, there are very few of these people i have any respect for. I moreso appreciate the open minded ideas of our future from renowned astro & theoretical physicists. They (bankers/economists/politicians/plebian media) prophesize the future based on cold numbers and even worse Ημιμάθεια. They are a farce and have no clue of what the real, masses economy comes from. If they do not know the masses they can not foresee what it will do. They can do anything they want, as centralized EU, or global system etc etc. They will never understand the masses economy and not knowing can not allow you to foresee or regulate it. From that moment and on, is where when we find ourselves to succeed and is where we will differentiate. And we will, because under the cloak of darkness we will find ways to survive, strive to improve and use that intuitive ingenuity which hard to find elsewhere. "You can't learn to survive, grow, improve on full belly in front of the fireplace" ...VTsipras, was right when he said Greece will exemplify how the future of the EU will be. He just does not understand that it will be threw our own ashes.

As an engineer myself i have very little respect for the lot of them, with the small exceptions including Mr. Kastner. And that because his mind is not locked.

Many people see Greece as dead-end, or slaves to debt, a new province of Germany or a waste to invest into. I like many, see Greece as an opportunity. The numbers don't show this and this is where "they" are sleeping. It is not about the numbers but what those numbers of investment represent. I see those numbers in what they represent, as i am within the mass economy. Pre crisis any investment figures where rubbish. (Iconic investments blown on whores, cars and night life. Belly fillers!) If you couple the privatizations (which as i have expressed has multiple positives), the core companies which have high profitability's and growth, the healthy mid sized businesses which invest and the small smart investors in small transactions, i can only be sure that we will turn this around. Likewise, the brain drain of Greece will also greatly contribute to the rebound. For as in the early 20th century, the mass exodus of Greeks from Greece was with a rock thrown behind the shoulder. Today no Greek leaving Greece wants to leave but does out of necessity. Their prosperity elsewhere and desire to return will greatly help contribute to the rebound of our country.

As child born in America, I knew I was a duck living in a Chicken coop, after visiting Greece at the age of 7. My 1st great country gave me much but I knew my blood line country could give me more. Upon arriving in 98 i saw the cracks, which only got worse leading to the crisis.

Now within the crisis i am only again starting to see what i saw at 7 again. The Greek, humility, sincerity, ancient Greek ethics and morals likewise Orthodox ethics and morals. This will bring us forward and disprove everyone. You doubt this? Because of a few idiot politicians or the "system." Greek people have already discredited both and are working around this already. It is like a cancer that has been marginalized only waiting for the right moment to eject it out of the body.

I am tired and frustrated but fight and i am sure I and my compatriots here and abroad will succeed united one day. That i can absolutely 100% about. To be completely honest i fear for the future of my 1st country, the USA, rather Greece.

Just like you I am an engineer and a US citizen. Greece is special to me and I left her at age 24. I now have 36 years in America a country which is excellent in many respects and perhaps a true model for Greece.

Greece has many opportunities but as long as it uses the euro currency any investments from outside the eurozone risk to become prisoners to Europeans politics and thus are not recommended.

The fact that Greeks continue to leave Greece for better opportunities abroad is a process alive since the ancient times. Lack of resources and Greek ingenuity became the reason for Greek colonies sprouting all over the Mediterranean basin and beyond. Greek immigration is a good thing for both the Greeks seeking better opportunities and the recipient country which benefits from Greek talent and dynamism abroad.

The problems of modern Greece is its horrible and incompetent political class which lacks the intelligence to steer Greece towards the alliances which maximize Greek benefit. Instead of Greece gravitating aroung the anglophone world (UK, USA, Australia, Canada etc) the Greek politicians have opted instead towards a sterile connection with German interests which are more in line with the Slavic population needs of central and eastern Europe. Greece therefore suffers from a severe misclassification of where it historically belongs and as a result it is treated as a far away colony of a construct that it does not belong to.

As far as the USA is concerned please do not worry at all. Despite all his personal character flaws Trump is a very intelligent and charismatic individual something none of his opponents were. America has a way of promoting the best and as a truly young country (at the age of a teenager) sometimes doubts itself but has not reached maturity yet. The best years for the US are ahead and I am truly greatful that both of my children are products of the best education America offers and have the freedom to decide their life path as it best suits them. That's America for you: freedom of choice and many life alternatives. I think we should better learn something about this as we engineer the future Greece.